gfiles magazine

September 28, 2011

■ Capital flight from India to the US through abnormal pricing lost India Rs 50,000 crore in 1993-94 in trade

■ The Government in 2004-05 should have collected Rs 5.64 lakh crore out of India’s GNP of Rs 28.20 lakh crore, whereas the collection was just Rs 2.25 lakh crore

■ The US sold tetracycline to India at over one hundred times per gram compared to the rate charged to other countries... for video cassettes 40 times higher...

■ The country lost Rs 2,38,999 crore against a trade deficit of Rs 1,24,995 crore. The country is cheated by Rs 2.5 lakh crore annually in foreign exchange

■ Indian money in Swiss bank accounts in 1996 was around $2,550 billion or Rs 119 lakh crore—equivalent to 40 years of the Budget of India at the time■ The first Voluntary Disclosure of Income Scheme to unearth black money was announced in 1951—barely a year after India received its Constitution!by BR LALL

AS a newly independent nation in 1947, India was on very solid ground compared to other economies for it was saved the destruction of World War II. Besides, during the war, the British had raised public debt in India and owed us the equivalent of Rs 1,713 crore in pound sterling. This amount came to be known as sterling balances. It was a largesum and, if put to development, could have led to tremendous progress as those were times of low costs globally and more so in India. But we slackened in work culture, moral codes and ethics, and indulged in vulgar display of wealth and wasteful expenditure. The abuse of office for personal ends became a sort of perk and norm. Corruption became rampant.

In 1951, a Committee on Public Administration under AD Gorwala was set up to suggest ways to improve public administration to ensure speedy execution. Its report included a special chapter on integrity. The findings of the committee hold true even today. It is intriguing that the country had degenerated to that extent in just four years. The report laments the lack of transparency and the tendency not to take any action against higher-ups and also to keep secret reports of corruption: “While small men are often troubled quite unnecessarily, tax-evaders, whose assessment should run into lakhs, seem to escape. The failure of the Income Tax Investigation Commission to produce any real results and the ease with which the most blatant tax evaders seem to be able to manage their affairs undisturbed has caused a very wide-spread belief in the impotence of the government when pitted against the really influential and wealthy people.” Sixty years later, the only change is that “billions” has replaced “lakhs”.

In corruption, apparently anyone may pay but the actual loser is the lowest. The buck is passed but the lowest 60-70% cannot do so any further. It is for this reason that no scam has ever been worked out. The consequences of this loot are deep. Resources are diverted, leading to (a) lack of infrastructural development; (b) lack of education, health, hygiene, sanitation and such other services and facilities; (c) lack of growth of employment opportunities; (d) increased pressure on land; (e) pressure on land leads to Naxalism; and (f) the country is forced to spend on guns in place of development. Besides, black money has a tendency to flow into the unproductive channel and also take flight abroad. Thus, the pyramidal top not only corners the productive resources but also turns them into idle, unproductive or stagnant assets and even carts them abroad.

A1995 study by Florida University, “Capital Flight from India to the United States through Abnormal Pricing in International Trade”, concluded that over-invoicing and under-invoicing led India to lose Rs 50,000 crore in 1993-94 in trade with the US.

Tariff by IBIL for electricity to Sanghi Industries was Rs 1.60 per unit, as againstRs 2.10-3.15 being applied all over India.

Power projects were allotted during the 1980s and ’90s at much higher costs. The Economic Times discovered the tariff of a captive plant set up by Ignifluid Boilers India Ltd (IBIL) to supply electricity to Sanghi Industries was Rs 1.60 per unit against a rate of Rs 2.10-3.15 being applied all over the country. The paper finds the reason: “The IBIL plant will cost only Rs 1.33 crore per MW, against more than Rs 4 crore per MW for ‘public sector projects’.”

Deadly legerdemain

AT a social gathering in 1995, I came across a practical instance of how the resources of the country were being drained and costs of production hiked, making ours a high-cost economy not competitive in world markets. The General Manager of a urea plant who had imbibed enough to throw caution to the winds, described to me how he had once been asked to prepare a scheme for a new plant designed for a particular capacity. He prepared a proposal for Rs 350 crore. The management asked him to raise it to Rs 700 crore in such a way that Rs 300 crore could be kept abroad. Of it, Rs 100 crore would go to the authorities in the Central government as hush money and the remaining would constitute deposits for the industrial house abroad. The remaining Rs 50 crore would create the necessary cushion for use within the country, that is, it would be black money within.

However, the government authorities refused to settle for less than Rs 200 crore. There was a stalemate for a few years. In the meantime, the fair estimate rose to Rs 700 crore. Finally, the share of those in government was pegged at Rs 400 crore. The industrial house planned its own deposits abroad, amounting to Rs 400 crore, and kept another Rs 100 crore for any exigency. The project cost was hiked to Rs 1600 crore. If fixed costs are hiked from Rs 350 crore to Rs 1600 crore, the costs of production have to go up. The man blamed the corruption in the government. What about his masters, I asked. If only the people in government were clean, they could have prevented his masters, he replied. He proudly declared that their old plant, set up in the good old days, was producing urea at Rs 3000 per tonne as against Rs 8000 per tonne of this new plant. There was a subsidy of Rs 4000 per tonne and they sold their entire produce at Rs 4000 per tonne in the market. His factory

as well as other factories of the group were making huge profits. The industrial house had recovered its entire investment by withdrawal of its own funds even before the factory commenced operation.

The detailed account as given by our friend from the urea sector and corroborated by other sources, raises certain questionswhile answering some others and rationalizes still other situations. First, a project of Rs 350 crore is hiked to Rs 1,600 crore, yet everyone is satisfied and it passes through various checks. Finally, the subsidy settles everything else. The country stands to lose in at least five ways directly: (i) foreign exchange to the extent of Rs 800 crore; (ii) drain of resources to that extent; (iii) subsidy has to be given; (iv) production becomes high-cost and cannot compete in a world market, threatening the survival of our industries and even agriculture; and (v) production loss of urea and ultimately of agricultural produce during the period of stalemate.

Second, in economies with comparable rates of taxation, the collection of central taxes is much higher. At 8.6% of GDP, India was one of the lowest against the world average of over 20%, though our business and industry will want us to believe that our rates of taxes are much higher. At the world average rate, the Union Government in 2004-05 should have collected Rs 5.64 lakh crore out of India’s accounted GNP of Rs 28.20 lakh crore, whereas the collection was just Rs 2.25 lakh crore. The collection should have been Rs 18 lakh crore if unrecorded income was also included.

Other countries also face tax evasion but they have made continuous efforts and even backward economies like Ghana, the Philippines, Peru and Bolivia have raised collection from 4% to 16% in just a decade.

The Hindustan Times, reporting on Florida University’s study for 1993-94, said: “India charged 200 times less for selling its exercise cycles to the US. The similar concession for industrial miners’ diamonds was 100 times less, for unworked diamonds nearly 120 times less, storage batteries 40 per cent less and regulators were found under-priced to the extent of 30 times.” The picture was just the opposite in case of exports from the US to India: “If in a unit-form US sold tetracycline at 11.74 per gram to other countries, the rate was 1102.50 per gram for India….for video cassette recording India paid 40 times higher, for chlorine India paid over 22 times higher.”

The study, repeated for 1994 and 1995 and reported in The Times of India, found similar facts and estimated maximum and minimum losses that might have been caused to the economy through the dual processes. It placed the losses caused to India at a minimum of 20% on imports and 40% on exports. The US is among the cleaner countries in international trade.

All the black assets are not kept in Swiss banks. There are other banks, real estate,business, purchases abroad while on a visit.

Even if the same percentage is extended to trade with other countries, India lost more than its annual balance of trade deficit on this score. Extending the same rates for 2004-05, when Indian exports touched $79,247 million and imports touched $1,07,066 million, the losses amount to $31,692 million and $21,413 million, respectively. In total, the country might have lost $53,111 million (Rs 2,38,999 crore) against a balance of trade deficit of Rs 1,24,995 crore. The country, according to the study, is cheated to the extent of Rs 2.5 lakh crore annually in foreign exchange.

This ill-gotten money is used for conspicuous consumption in India and abroad or in creating assets in the black sector, inflicting an immediate corresponding loss on our economy as the resources are frozen, taken outside the economy, carted abroad and spent or stored, giving a fillip to economic activity in other countries.

Journalist Olga Tellis, referring to a statement by a Swiss bank official, states that holdings of Indian money in Swiss bank accounts was around $2,550 billion or Rs 119 lakh crore –equivalent to 40 years of the Budget of India at the time. The law of the land does not authorize anyone to keep money in a foreign bank abroad. So it is all black money. Such holdings must have doubled to at least $5 trillion. Much noise is made about our outstanding external debt of $100 billion, which is peanuts compared to these huge holdings.

IT is often said that the black economy runs parallel to or is bigger than the accounted economy. Various estimates ofblack money in the country have been made from time to time. It can be studied through various modules, aided by making certain realistic assumptions but the results would only be indicative and not definitive.

India charged 200 times less for exercise cycles to the US, 100 times less for industrialdiamonds, 40 per cent less for storagebatteries, and 30 times less for regulators.

Basing our calculations on the declared income would be inaccurate and misleading as whatever goes into the unaccounted stream is to be reckoned as part of total income. Since the two are in the ratio of 60:40 or 3:2, the unaccounted income has to be taken as two-thirds of the accounted income. The accumulation of black money is thus Rs 135.18 lakh crore in a single decade. For the last few years, the media puts the current rate at 50%, that is, the volume of accounted and unaccounted income is the same. In that case, the black money generated will be over Rs 200 lakh crore in this decade. The money/resources thus diverted from the mainstream would also have grown. It is anyone’s guess how much black money has been generated in the five decades of independence. In the light of this, the figure of Rs 119 lakh crore deposits in Swiss banks in 1996 could be probable.

WHY & HOW IT HURTS

The money thus cornered becomes a separate entity by itself in the economy. A part of it is then drained out abroad. Somepart of this is again brought back into the country, but the bulk remains abroad. The mechanism is as follows:

◗The country turns poorer by that amount directly.

◗Income and employment by this investment accrue abroad and India stands to lose.

◗India loses by way of loss of economic activity within the country.

◗Losses are not only direct but also on account of non-accrual of benefits by operation of multiplier and accelerator effects.

◗Conspicuous wasteful expenditure to flaunt one’s riches has a demonstration effect and various consequential vices.

Note: The first Voluntary Disclosure of Income Scheme (VDIS) to unearth black money was announed in 1951—barelya year after India received its Constitution! Subsequent schemes came in 1965, 1975, 1985, 1987 and 1997.

All the black assets are not kept in Swiss banks. There are other banks, and also other forms such as real estate, investment in business, expense on children’s education abroad, purchases abroad while on a visit, lavish spending abroad for which certain sections of Indians are well known. Assets are also held in various other forms such as gold, diamonds, other jewellery and business.

The bulk of the money is from the black sector, as they do not pay taxes. All this becomes possible and defies any action by the state, as secure, well-laid and tempting infrastructure for such crimes is available. Unless these countries relax banking secrecy, as they have in the context of drug money, the poor nations are helpless. Even the mighty US was helpless as long as the secrecy laws were in force but has done very well in going after drug money following the relaxation of secrecy laws. But there is resistance against such relaxation regarding slush born out of corruption which is a Third World problem. g

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